Questions Linger Over Sweepstakes Casino Regulatory Backlash

March 7, 2024
After regulators throughout the U.S. cracked down on pick'em-style fantasy sports due to their similarities to sports betting offerings, many have wondered if sweepstakes-based online casino games could face similar scrutiny in 2024 and beyond.

After regulators throughout the U.S. cracked down on pick'em-style fantasy sports due to their similarities to sports betting offerings, many have wondered if sweepstakes-based online casino games could face similar scrutiny in 2024 and beyond.

Discussion of the issue was one of the dominant topics raised during various sessions at the NEXT Summit New York on Wednesday (March 6) in Manhattan.

“You can say that the legal structures are different, and they are, but the parallels between what has happened with player prop pick’em in the last 18 months and where theoretically sweeps could go is painstakingly obvious,” said Will Green, a gaming industry advisor and founder of Acutus Strategies. 

“Sweeps is on the precipice of having its moment in the sun, whether it wants to have one or not,” he added. “That's going to be, I think, the most dominant, talked about vertical of 2024 – just like player pick’em [daily fantasy sports] DFS was in 2023.”

More than a dozen states have taken steps since the beginning of 2023 to limit single-statistic, against-the-house daily fantasy games, including regulatory changes and sending cease-and-desist letters to prominent operators, such as PrizePicks and Underdog Fantasy.

Sweepstakes-based games differ from real-money online casino games by allowing players to either play for free or purchase credits to fund their gameplay and then receive additional free credits. Only the free credits awarded to players are redeemable for cash or other prizes. 

“There's no entry fee, so if a person enters for free, then the underlying game could conceivably be based on anything,” said Bill Gantz, a partner with Duane Morris law firm who has represented sweepstakes casino operators in litigation. 

“And that's because gambling [necessarily involves] prize, chance and consideration. If you take one of those things away generally, then you can have sweepstakes, and in the case of the sweepstakes, there's no consideration and there's a free entry method regardless of what type of model you're using.”

Late last year, Michigan took steps to curtail sweepstakes casinos, sending cease-and-desist letters to several prominent sweepstakes operators arguing that the companies were offering illegal gambling.

Michigan is one of only six U.S. states to offer full online casino gaming.

“We'll see if any other states take the position, but I don't think that the laws that they would raise are super clear for them to take a position that it's unlawful,” Gantz said. “And certainly there's payment processing for these games for freemium and sweepstakes [models], so that'll be the thing to watch for in 2024 and 2025.”

“There are at least four to five hundred just freemium gaming apps on the Apple and Google Play network, it is to scale,” he added. “This is not a new controversy or anything like that.”

Gantz also added that despite the lack of regulation, many sweepstakes game operators have taken steps to improve know-your-customer and geolocation processes to meet the requirements of payment processors.

“Is it as rigorous as a licensed sportsbook? Perhaps not, but those are things the industry has taken upon itself to police,” he said. “So it is not regulated, but it has taken steps that are consistent with what you might see in regulation.”

Dawn Himel, deputy director of the gaming division of the Louisiana Attorney General’s Office, said that while she was not offering a legal opinion, there is an argument to be made that sweepstakes casinos would run afoul of Louisiana’s stricter laws than other jurisdictions regarding games of chance outside of the regulated space.

“We don't have social games; if it's not regulated, it is illegal gambling,” Himel said.

“Especially as other states start to look at things, the regulators in each state start to look at it as well,” she added. “Just like with pick’em, same with sweepstakes, you start throwing your products into the light, and it could be that you were only getting by with it because the regulators didn't know you were doing it.”

One potential path for sweepstakes operators to take to avoid a regulatory backlash, Green said, is partnerships with licensed gambling operators.

“I know people are like, 'What do you mean? You know that that's a competitive product?', [but] it doesn't necessarily have to be because if you're competing and you're running along over here, that's all well and good until incumbents with more leverage than you decide that it's not good and that that's bad,” Green said. 

“And so that feeds into the whole, let's make hay while the sun shines sort of mentality, which is great for a few years, but it's not great for longevity.

“I think until you get to that point of, 'How can we fit into your storefront, DraftKings?', or, 'How can we actually drive revenue and drive customers in some sort of partnership to a company that's in the regulated environment?', then you'll be really shocked how the Michigan regulators or other regulators might maybe take a different view if they're part of the family,” Green said.

Green added that efforts have begun with sweepstakes companies organizing to put together a message to take to regulators and operators who could be unfriendly to their existence.

“A fragmented, disorganized industry does not have a core value proposition to powerful incumbents; an organized industry can translate that value proposition and can act on it. So I think that's a key aspect when we talk about being addictive,” he said.

“It's also a key aspect when we talk about maybe communicating with, in this example, Michigan or other state regulators, you know, why is it illegal.”

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